It may not seem like the US dollar was strong through the opening session of the week considering the EURUSD was little changed, but the individual currency certainly outperformed surrounding fundamental trends. While it is true that the world’s most liquid currency pair – EURUSD – was little changed through the day Monday, that is a reflection on dollar strength considering that the euro itself was up against all of its major counterparts. Furthermore, the greenback managed gains against most other counterparts. This would lead the Dow Jones FXCM Dollar Index (ticker = USDollar) to its biggest daily rally in over two weeks which lifted the benchmark above 10,300 to test the highest close since November 30, 2010. It’s an encouraging performance, but falls short of proving conviction in a serious bull trend through the week.

Measuring the fundamental winds in the financial and FX markets this past session, the greenback’s performance was notable as it wasn’t supported by a robust risk aversion effort. As the currency market’s favored reserve, the dollar chart tends to look like a mirror of the S&P 500 – a benchmark of the appetite for yield that has increasingly found support through stimulus. However, through Monday, global equities were mixed and little changed overall on the day. Furthermore, Deutsche Bank’s carry trade index rose to meet multi-year highs and the traditional VIX Index held below 13 percent. Overall, this is a lean towards risk appetite - though not a very aggressive one.

So, while the dollar’s strength is remarkable; it is not a very convincing performance outside of the standard fundamental themes we expect the currency to follow. In other words, if there is another concerted effort to move away from safety assets; the greenback is unlikely to hold back the tide. As the week wears on, we will see event risk that better taps into general sentiment. This past session, the G30’s call for investors to ramp up volume by $7 trillion in the world’s largest economies by 2020 or risk a global slowdown was a soft risk (one too far into the future to be deemed a problem for near-term speculation). The Eurozone Finance Ministers’ meeting tapped risk trends, but they didn’t offer up much to stir crisis fears (more on that below). Moving forward, GDP reports and a G20 meeting – which will supposedly center on a budding currency war – will carry more weight. Meanwhile, back at home, Fed Vice Chairman Yellen was leveraging the dollar’s low-yield issues by remarking that there was no guarantee that rates would rise once the central bank’s thresholds (on unemployment and inflation) were breached.

Euro Climbs as ECB Members Ward Off Currency War, EU Meets

Fundamentals were at work for the euro through the opening 24 hours of the new trading week – though we have yet to touch the nerve that will carry a full trend for the currency. Top billing heading into the session was the Eurozone (the 17 countries that use the euro) Finance Ministers meeting. The event was scheduled to cover such hot topics as Cyprus’ contentious bailout, Greece’s progress, the financial conditions for Ireland and Portugal, and bank recapitalization under the ESM program. There was a lot of potential in this meeting, but it was never fully realized. According to Eurogroup President Dijsselbloem, the meeting was a short one and most of the top issues were deferred to March. This likely means that Tuesday’s EU Finance Minister meeting will garner even less interest.

In the meantime, the Euro’s refusal to join the burgeoning global currency wars continues to play to immediate speculative interests. Two ECB officials made statements to rebuff calls to adopt an FX specific policy. Central banker Weidmann remarked that the euro wasn’t ‘seriously overvalued’ and that intervention historically ends in failure. The ECB’s Asmussen leveled his anti-FX policy view with France in mind.

Japanese Yen Tumbles as BoJ Candidate, Eco Minister Demand StimulusA conspiracy theorist would have a field day drawing scenarios of Japanese officials’ strategy for keeping the yen down. Yet, this may be an instance where such claims are true. In the past 24 hours, we’ve heard Prime Minister Abe repeat his call for the BoJ to do all it can to fight deflation. Finance Minister Aso said that he would tell the G20 Japan plans to continue its effort to fight deflation – rebutting suggestions they would back off to appease his counterparts. Most extreme, Eco Minister Amari said he wants the Nikkei 225 at 13,000 by the end of March.

British Pound Collapses in a Quick Return to 1.5650

The sterling plunged through the opening session of the week. The broad drop – excluding GBPJPY – was punctuated by the GBPUSD’s 140-pip drop that fully offset the advance carved out through the Thursday/Friday rebound. Is this a move that sustain momentum and break a four-year rising trendline? That depends on follow up catalysts. Risk aversion would certainly do it. Today’s CPI, though, carries less heft.

Policy officials are generally cheerleaders for their own economies and financial systems. Sometimes it can be difficult to draw out a genuine forecast from these involved market participants. Yet, opposing policy efforts can offer a surprisingly candid assessment. Therein lies the interest with the SNB’s Zurbruegg’s remarks that the Eurozone troubles still necessitate a 1.2000-floor for EURCHF.

Without a convincing bearing through risk trends – either FX or capital market-based – there wasn’t an overriding demand for the high-yield Australian dollar. Yet, considering the rather tame speculative bearing on the day, it seemed the currency has underperformed its potential. That may be due to a building speculation of a February rate cut from the RBA. Currently, the market probability for a 25bp cut is 49 percent.

Gold Breaks Congestion Early, Suffers Biggest Drop in Five Weeks

I was expecting a breakout from gold this week given the tight range that the metal was trading, but I didn’t think it would find resolution so early. Indeed, the precious metal dropped 1.2 percent Monday for the biggest drop in five weeks. The refusal from European authorities to join the currency war helps, but it may not be enough to progress this bear trend through important 1,640 support.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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